Shale Takeovers Looming as Texas Discounted in Australia

By James Paton and Angus Whitley -
Sep 28, 2012

Buyers seeking a piece of North
America’s shale boom can find it in Australia.

Australian companies exploring for oil and natural gas
that’s trapped in shale rock in the U.S. and Canada are valued
at a median of 11 times their reserves, a 23 percent discount to
their counterparts that are listed on stock exchanges in North
America, according to data compiled by Bloomberg. The valuation
gap -- driven by Australian investors who are more than 8,000
miles (12,800 kilometers) from the companies’ wells in Texas and
Oklahoma -- may lure acquirers, said RBS Morgans Ltd.

Antares Energy Ltd. (AZZ) is among potential targets, with its
Southern Star field in the Permian Basin in Texas worth more
than twice the company’s $130 million market capitalization on
the Australian stock exchange, estimates Hartleys Ltd. Adelaide-
based Sundance Energy Australia Ltd. (SEA), which last month agreed to
sell a North Dakota asset for more than the company’s market
value at the time, could lure bidders with its remaining acreage
that’s worth at least five times more than what’s reflected in
the share price, said Bell Potter Securities Ltd.

“I expect many more transactions involving Australian
players and the huge number of U.S. and international players
currently looking to open up and exploit shale gas and shale
oil,” Ben Griffiths, who helps oversees $1 billion in assets
for Sydney-based Eley Griffiths Group Pty., said in a telephone
interview. “The area is a hive of activity and that’s not going
to lessen.”

Suitors Approach

Antares rose as much as 3.1 percent today before ending
Sydney trading unchanged at A$0.485. Red Fork rose 4.3 percent,
while Sundance was up 1.3 percent after rising as much as 3.3
percent earlier. Molopo fell 3.2 percent to A$0.605.

Molopo isn’t in any takeover discussions, Chief Executive
Officer Tim Granger said in a phone interview from Calgary.
Granger said Molopo is undervalued, partly because of a lack of
understanding among Australian investors about the company’s
Wolfcamp project in Texas.

Antares has been approached by suitors interested in its
Permian Basin projects and will consider bids that reflect
valuations paid for similar assets, Chief Executive Officer
James Cruickshank said in a telephone interview from Dallas.
Antares, based in Perth, is also considering listing shares in
the U.S., he said.

U.S. Focus

Formerly known as Amity Oil Ltd., Antares changed its name
and shifted its focus to the U.S. in 2004, after scrapping its
Whicher Range gas project in Australia and cutting reserves in
Turkey. The company invested in the Permian Basin in 2011.

That basin, a 300-mile long geologic formation that has
been gushing oil and gas for more than 90 years, is attracting
interest from major international oil producers who quit the
region in the mid-1980s when oil prices were lower. The
development of so-called hydraulic fracturing to extract gas
trapped in shale rock has opened formations formerly written off
as uneconomic.

Southern Star

“Antares is definitely a candidate for transactional
activity on a corporate and an asset basis,” Dave Wall, an
analyst at Perth-based Hartleys, said in a phone interview.
“Investors in Australia don’t have a deep understanding of the
Permian. In Canada, it would be trading with a much higher
market cap.”

Antares’s market value yesterday was A$124.6 million ($130
million).

Wall pointed to BreitBurn Energy Partners LP’s purchase of
oil and gas properties next to Antares’s Southern Star field.
Los Angeles-based BreitBurn paid $220 million for 9.5 million
barrels of oil equivalent of estimated proved reserves,
according to a statement. Based on that price, Southern Star
could fetch as much as $294 million, Wall said.

Antares is worth A$1.22 a share, or more than twice its
closing price of A$0.485 yesterday, according to a sum-of-the-
parts valuation Wall published on Sept. 5.

Sundance last month said it would receive $172 million for
a stake in North Dakota’s Williston Basin from Denver-based QEP
Resources Inc. Sundance, which had a market value of about $162
million at the sale’s announcement, leapt 38 percent in one day.

Shale Standout

Even after selling the Williston Basin acreage, Sundance’s
concentration on areas rich in so-called natural-gas liquids
such as propane may appeal to potential buyers, said Johan Hedstrom, an analyst at Bell Potter.

“U.S. companies are quite active in the shale space,
particularly in assets with a liquids focus, and that’s what
Sundance has,” Hedstrom said in a phone interview. “That makes
them a standout.”

Hedstrom has a 12-month share-price estimate for Sundance
of A$1.20 a share, 60 percent above yesterday’s closing price.
The company’s Bakken formation assets are worth about $15,000 an
acre, and other fields about $5,000 an acre, higher than the
$1,000-per-acre value implied by its A$0.75 share price, he
said.

Valuation Gap

“The oil shale assets are certainly being looked at by
companies that need long-term reserves,” Krista Walter, a
Sydney-based energy, oil and gas analyst at RBS Morgans, said in
a phone interview. “Asset sales are common but company
takeovers can happen as well.”

Still, the Australian companies aren’t fetching the
valuations they deserve, said Bell Potter’s Hedstrom.

Eight companies with U.S. oil and gas assets have a median
enterprise-value-to-reserves ratio of 11 times, data compiled by
Bloomberg show. That includes Antares, which has an enterprise
value of $178 million, or 7.2 times its proven and probable oil
and gas reserves of 24.8 million barrels of oil equivalent, the
data show.

The median of 25 North American companies with exposure to
shale oil and gas, including EQT Corp. (EQT) and Range Resources
Corp., is 14.3 times, the data show.

“We’re much better informed and educated about shale than
we were 12 months ago, yet the Aussie companies with U.S. assets
haven’t had much of a rerating,” Hedstrom said.

Debt Load

One reason for the gap is that Australian investors aren’t
comfortable investing in assets so far away, said Antares’s CEO
Cruickshank. Antares wouldn’t choose Australia as a trading
venue if it were conducting a share sale today, he said.

“You get the highest possible valuation for assets when
they are owned by the people who are closest to them,” he said.
“Australians seem pretty comfortable investing in Asia. The
Americans are very good at investing in Canada.”

Some Australian companies are also drawing a lower
valuation because they have higher levels of debt than
Australian investors are typically comfortable with, said Walter
from RBS Morgans. This would be less of a problem for U.S.
investors, she said.

Antares has net debt equivalent to 53 percent of its net
assets, compared with an average of 85 percent of shareholder
equity for the 25 North American companies, data compiled by
Bloomberg show. Macquarie Group Ltd. has also agreed to lend
Antares as much as $200 million under a debt facility.

‘Game-On’

“Many of these companies tend to have debt facilities in
place for capital expenditure requirements and Australian
investors tend to prefer companies that don’t have large debt
facilities,” Walter said. “In the North American market,
that’s more common.”

Molopo, another potential target, sold its Australian coal-
bed methane holdings to PetroChina Co. in August so it could
focus on the U.S. and Canada, while Red Fork has projects in
Oklahoma covering a combined 145,000 acres, according to its
website.

Molopo also is considering a listing on a North American
stock exchange, potentially Toronto, CEO Granger said last
month. The listing closer to its operations may help Molopo’s
share price “get treated with a little more respect,” he said.

“It’s game-on over there, and for the right basins with
the right producible characteristics, those assets will be
keenly sought,” Griffiths, the fund manager, said. “We’ve seen
a couple of successes and there will be a few that won’t work,
but it looks like it has worked well for the Aussies.”